Get Systematic in 2024 - by Jason Kelly
Every year at this time, Wall Street forecasters put out their guesses for what will happen in the new year. They tell you what they think will go up, what will go down, and warn you about the risks you supposedly need to worry about.
It all feels so responsible, such that reading this financial tapestry gives investors a comforting sense of taking control of their money. But it’s a false sense of comfort. Forecasting brings an infamous 50% mistake rate. You could toss a coin and do as well, making it a waste of energy to move your money around based on what might — but might not — prove true.
For 2024, I have a different idea for you.
Why not embrace a strategy that isn’t swayed by the winds of prediction but instead navigates the market’s ebb and flow with a proven, rules-based approach? This is the philosophy I champion in The Kelly Letter, cultivating a track record of success through steadfast adherence to a systematic method, resilient to the whims of market forecasts.
The letter’s portfolio never changes because it’s built to operate in all environments, and has done so. It contains three growth plans:
The 3% Signal — This conservative “3Sig” plan is the epitome of prudence, for risk-averse investors who still want to beat the market over time. It uses the IJR small-cap stock fund and a general bond fund.
The 6% Signal — Adding a dash of boldness, “6Sig” combines the MVV mid-cap leveraged stock fund with a general bond fund.
The 9% Signal — Sitting atop the aggression scale, “9Sig” serves investors who are willing to ride out high volatility in exchange for high performance. It’s powered by the dynamic TQQQ Nasdaq 100 leveraged stock fund alongside a general bond fund.
That’s it, just three stock funds and three bond funds, which never change.
So how can it navigate all environments? By rebalancing to a growth target each quarter.
This is not rote rebalancing, for example back to a 60/40 stock/bond mixture, but rebalancing the stock fund to a percentage growth target each quarter. It’s a more nuanced strategy, and more effective because it adjusts the size of its buys and sells based on the size of the price change. If stock-fund prices rise a little, these plans sell a little. If they rise a lot, they sell a lot — and vice versa when buying.
If you’ve studied investing, you’ll recognize this approach as a variation of value averaging. On top of it as a foundation, I’ve added various rules to improve performance. The efficacy of these plans is plain in the chart atop this article.
A benefit of this rules-based approach is that it does not require forecasting. That’s good, given forecasting’s 50% mistake rate. The chart above shows that the letter does not avoid drops. It goes through the market’s ups and downs, but takes advantage of them so that a down cycle becomes an opportunity to buy (in a quarterly rebalance) and turn a subsequent up cycle into bigger profits. When you invest in this manner, you might still tune in to market chatter but as an informed and detached observer, not someone who needs to figure out what to do with the latest guesswork from pundits.
Such guesswork appears all the time in financial media. Finance is inherently uncertain, making coin-toss accuracy nobody’s fault, but it’s also to nobody’s benefit. Forecasting is useless to a person trying to build a better future in the financial markets. It causes non-beneficial trading activity, increases stress, and usually reduces performance. When an investor gets lucky in a speculation, it’s all they’ll talk about as they ignore their unlucky trades, but over time the law of averages relegates trading activity to the detrimental column.
Let’s take an example from earlier this year.
Silicon Valley Bank went bankrupt on March 10. It was the second-largest bank failure in US history, and the largest since the subprime mortgage crash of 2008.
A waterfall crash in the value of SVB’s investments sent its stock careening and spawned whispers of a bank run. Investors dumped shares of SVB peer banks, causing repeated halts in trading of at least five bank stocks. Analysts warned of contagion into a 2008-style meltdown.
The week ended March 10 looked as follows in the US stock market:
Week Ended 3/10/23 (%)
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-4.4 Dow
-4.7 Nasdaq
-3.8 Nasdaq 100
-4.6 S&P 500
-7.4 S&P 400
-7.7 S&P 600
On March 10, Dennis Kelleher at Better Markets issued the following statement:
“The failure of Silicon Valley Bank (SVB) today … is going to cause contagion and almost certainly more bank failures. SVB’s condition deteriorated so quickly that it couldn’t last just five more hours today so that the FDIC could take it over on the weekend for an orderly resolution. … SVB is just the beginning. Contagion, likely more bank failures, and various bailouts are almost certainly coming.”
Then, on March 15, the New York Times reported that “regulators had abruptly shut down Signature Bank to prevent a crisis in the broader banking system. The banks’ swift closures have sent shock waves through the tech industry, Washington and Wall Street.”
Mid-March’s mood was shot. Sentiment collapsed, with CNN’s Fear & Greed Index falling to 25, the edge of extreme fear, and the American Association of Individual Investors (AAII) Sentiment Survey reaching its lowest bullish percent all year: 19.2.
You know by now what happened next.
Of course stocks recovered, in the near term but also the longer term through today. After March 10, the S&P 500 rose nearly 19% to July 31. From March 10 to yesterday’s close, it rose more than 22%.
However, that’s not the salient point. The salient point is that people guessing what to do with SVB’s collapse had to toss a coin. Will it turn into a 2008-style contagion, in which case I should sell my stocks; or will stocks bounce back from these lows, in which case I should invest more? In hindsight, we know the correct choice to have been the latter.
But is this how you want to invest, by guessing after every event whether to add or subtract from your stock holdings? Numerous studies show that such an approach reverts to the 50% mistake rate and a mediocre investing performance, not market-beating results. S&P Global reports that, through June 30, some 61% of US large-cap funds underperformed the S&P 500 over one year, and 92% did so over 15 years.
Active investors work hard to forecast what news means to markets. They study charts, pore over fundamental data, examine economic history, and more. They engage in this activity earnestly, hoping to gain an edge on market performance, but in aggregate their efforts backfire. They are reluctant to admit this due to the risk it poses to their careers and pride, but it’s true, as S&P Global and other firms prove. Rather than finding better approaches, they continue down the road of fancy guesswork and excessive activity.
By comparison, consider how The Kelly Letter’s rules-based approach handled the SVB collapse:
Did nothing in response to SVB’s bankruptcy.
Stuck to its predetermined rebalancing schedule.
Bought more shares of IJR and MVV on April 3.
Why not change to this winning approach in 2024?
Cast aside the traditional, yet usually futile, ritual of deciphering December’s financial forecasts. This year, take a leap of courage and replace guesswork with a strategy that has stood the test of time. Equip yourself with a dependable system heading into 2024, and say farewell to the unreliable toss of a coin.
I invite you to learn more about The Kelly Letter. Please click here to see if it’s the right fit for you.
Thank you for reading Signalizer. This post is public so feel free to share it.
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SOURCES
The Kelly Letter
Current Performance
Better Markets
Growing Banking Crisis Caused by Contagion from Silicon Valley Bank Failure Going to Get Worse
New York Times
Banking Turmoil: What We Know
S&P Global
SPIVA
Thank you for reading Signalizer. This post is public so feel free to share it.
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